Category: Business Growth

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Business Growth

Hedging a Seven-Year Auto Lending Bet

According to credit bureau Experian, 19 percent of new-vehicle debt and 11 percent of used-vehicle loan terms were 84 months in 3Q 2022. By comparison, Experian data revealed that only 11 percent of new-vehicle borrowers and 4.1 percent of used-vehicle borrowers in 3Q 2018 were on the hook for an 84-month auto loan. That’s seven years of debt on a vehicle that begins to depreciate the minute it’s driven off the lot. Outside of lending terms, how is your credit union hedging its bets in the automotive lending space?

Rising vehicle costs, rising inflationary interest rates and continued concerns about the economy have prompted buyers toward lower monthly payments and longer-term loans. Lenders are also willing to offer pre-approved rates at upwards of 96-months on the strength of interest-derived revenue and low delinquency rates. But, how long can that last?

The state of auto lending is not a one-dimensional picture. Let’s look at some details to get a better view of the rewards – and risks – of long-term auto loans.

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Business Growth

2023 – Managing the Tipping Point

Credit unions have an extra reason to celebrate over the holiday and new year season. According to the third quarter State of Automotive Finance Market Report from Experian, credit unions now account for the majority of the auto loan market share. Whether they keep these gains in 2023 is yet to be seen. While Federal Reserve prime rate increases do not directly translate to increases in auto loan rates, there are some notable ripple effects that auto lenders are watching. Fluctuations in new and used car prices, higher down payments, longer loan terms, increased defaults, and loan-to-value ratios will all factor into the mix next year. We look forward to collaborating with our credit union lending partners and keeping the scales on an even keel.

GAP for some

Keeping a close eye on the loan-to-value ratio on every deal will be key for lenders in 2023. We encourage our lending partners to offer GAP on those deals with lower down payments and a higher risk of default if the vehicle is deemed undriveable and insurance coverage does not cover the replacement value. For some customers, having GAP coverage in addition to a vehicle service contract can mean the difference between a major tip of the scale or a manageable event.

Reaching the limit

Higher monthly payments and longer payment terms are becoming more common place as the price of both new and used vehicles continue to rise. While some buyers might focus only on the short term, auto lenders who look across their total portfolio might see signs of caution. Even credit union members who are considered prime can run into difficulty in uncertain economic times. Debt protection products such as WALKAWAY® can provide some counterweights to keep the scale in balance and protect positive revenue in 2023.

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Business Growth Economy

Maintaining Market Share Gains

Credit union auto lenders received an early holiday gift in the form of Experian’s State of the Automotive Finance Market Report: Q2 2022. According to the quarterly report, credit unions’ auto lending market share increased to 25.81 percent, from 18.32 percent in Q2 2021. In comparison, captives decreased to 22.64 percent this quarter, from 28.47 percent the previous year. This was the highest increase of total market share credit unions have ever experienced. Whoop!

What prompted this exceptional gain? While captive lenders beat a hasty retreat from incentives, credit unions stayed flexible, offering lower interest rates to consumers seeking the best auto financing deal they could find. In Q2 2022, credit unions’ new vehicle market share increased to 26.69 percent, from 15.27 percent in Q2 2021, and grew used market share from 23.49 percent to 28.62 percent year-over-year.

Is this positive trend an anomaly – or do credit unions have the potential continue this growth into 2023? The answer depends on whether credit unions continue those practices which separate them from the competition as well as responding quickly to shifting consumer needs during these uncertain times.

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